The question of how to invest is an important one, never more so than in a time of stock market turbulence. 2018 has seen one of the US stock market’s worst ever days, followed by a six day rally, but all adding up to a resurgence in volatility. So, how to invest (and why) in 2018?

What’s your goal? Keeping all your money in cash does not eliminate risk. So start by knowing what you need your money for, and when, as this is the key to deciding how much investment risk you are completely comfortable with.

What type of investment? Understanding the long term expected risk and return of various asset classes allows us to construct a portfolio that controls risk through global diversification.

Don’t be a trader. Because most of us are terrible at it. Those fully invested in the S+P 500 between 1995 and 2015 earned a 10% annualised return but those who missed the 10 best  days earned only 6% – and 6 of those 10 best days were within 2 weeks of the 10 worst days.

Stay invested. Volatility has returned with a vengeance but stock market history teaches us that every bear market has been followed by a recovery. Staying invested has always rewarded patient investors, particularly those who continue to invest year in, year out.

Avoid emotional biases. Media headlines are impossible to avoid in times of market stress but as this recent FT article by Undercover Economist Tim Harford points out, switching off the noise and keeping your emotions out of the investment process is the best way to stick to a financial plan.

Money Smart can design a globally diversified multi-asset long term investment portfolio for you – for life. Call 01 276 0006 or email info@moneysmart.ie.

As we watch global stock markets once again hit all-time highs, a perennial question is, how can we become more successful investors?

My simple answer continues to be, stick with my 4 golden rules below.

1. Don’t Hoard Cash

Cash should be for very short term savings and nothing else. Hoarding money in deposit accounts is not an investment strategy. Investing means taking some risk to enjoy better returns – for me that means continuing, all through life, to invest surplus cash as soon as I have it.

2. Never Speculate

Ever. So don’t buy individual shares, never time markets, never speculate on whether a certain country or asset class will do better than others. Why? Because then you are a market trader and taking all the unnecessary extra risks that implies.

3. Diversify

So how should we invest? Simple. Diversify across geographies and asset classes using a multi-asset fund of funds. Irish investors over the age of 10 have no excuse if they haven’t learnt the big lesson from the crash.

4. Stay Invested

Finally, ignore all the politics (Trump, Brexit, Elections, etc) and ignore all the noise (experts, talking heads, market gurus, etc) and stay invested.

These 4 unbreakable rules of investing are the core of the Money Smart investment philosophy. If you want to know more or need help with your money call us now on 01 276 0006.

Did Donald Trump, with Buffett-like financial genius, really turn $1m into $10bn? Can we learn something from his self-proclaimed golden touch? For those of you who have more to do than tweet / watch TV (perhaps in a bathrobe?) and want the executive summary, the short answer is… No. And here’s why…

Daddy’s Money

Donald Trump’s father Fred ‘had a good war’, by which I mean he got seriously rich building houses for American soldiers. By 1974, the Trump business was worth $200m, at which point Donald inherited $40m* (not the $1m “small loan” he claims) plus tens of millions more in later years. Business Week estimated Trump’s net worth at $100m in 1978 and the Washington Post has pointed out that if he had simply put that money in the S&P 500 index he would be worth over $6 billion today.

Trump Net Worth

So what is his net worth today? This is as hard to nail down as a Trump tax return. The man himself claims he is worth $10bn whereas Forbes (which compiles the annual rich list) puts his true net worth at $3.7bn.  So in other words, if he had put all his wealth into a simple stock market index fund, he’d be almost twice as rich as he is now. Or if he had asked Warren Buffett (now there’s a true financial genius) to invest his money for him, he’d be six times richer.

Can You Beat The Donald At Investing?

To borrow a phrase from his much-missed predecessor, yes you can. By sticking to an appropriate financial plan and investing over the long term in a simple index tracker you’ll almost certainly earn a much better percentage return than Trump has managed. Mind you, starting off with a “small loan” from the old man would also help!

*Sources: The Washington Post / The Motley Fool / Investopedia / Forbes / Business Week / Fortune / Bloomberg / Fake News Network (sorry I mean CNN)

Want to make your investment portfolio great again? Contact us at info@moneysmart.ie or 01 276 0006.

Our big financial errors vary by age but a recent Wall Street Journal article highlights a big money mistake than young people are making today – they are not taking enough risk.

The table below is taken from that article and shows that millennials are holding as much as 70% of investible assets in cash. Several studies, not just this one, show people in their 20s playing it very safe by holding lots of cash in bank accounts and making extremely conservative investments.

Reasons for this vary but usually revolve around a lack of financial literacy and a failure to grasp the power of long term investing.  Of course the recent memory of a huge financial crash can only exacerbate investment caution. And there will be some who are rightly playing it safe as they save for a new home deposit.

Now for those unsure why they should invest aggressively in these early adult years, it mostly comes down to a single indisputable fact – the power of compounding.

The young have plenty of that most cherished investing resource – time. Being able to put money away for a long time creates the freedom to absorb the ups and downs of a multi-decade stock market investment. And it allows investments to compound over time – meaning dividends and gains are not extracted but are automatically re-invested year after year. Money doubles every 12 years with net 5% annualised gains. Which means the investment portfolio of a millennial should look more like 70% equities rather than 70% cash.

Learning this lesson by starting investing in equities as early in your life as possible can help sow the seeds for a lifetime of unworried investing and ultimately a very comfortable retirement.

The U.K. votes on Thursday on whether to leave or remain in the European Union. With the two sides neck and neck in the polls, markets are extremely volatile. A vote to leave will undoubtedly cause market disruption. So what should investors do? We say, as always, stay invested. Here’s why…

Cash is not the answer. Moving to cash does not eliminate risk. Yes it may help you sleep at night but it exposes you to the very real risk that inflation will drastically reduce the future purchasing power of your money.

Trading kills returns. Think you can outsmart the market and avoid the down days? Think again. Most investors are terrible at trading/guessing. JP Morgan calculated that those fully invested in the S+P 500 between 1995 and 2015 earned a 10% annualised return but those who missed the 10 best days earned only 6% – and 6 of those 10 best days were within 2 weeks of the 10 worst days.

Don’t miss the bounce back. Volatility is inevitable but stock market history teaches us that every bear market has been followed by a recovery. Staying invested has always rewarded patient investors, particularly those who continue to invest year in, year out.

Avoid emotional biases. Doing nothing in periods of market stress may be difficult in the face of constant media headlines but staying invested, switching off the noise and keeping your emotions out of the investment process is the best way to stick to a financial plan.

A diversified portfolio is for life. That’s why we spend so much time considering client circumstances and objectives. We recommend multi-asset portfolios designed to withstand market cycles. Your financial goals are long term – your investment behaviour should match that.

Money Smart can design your diversified long term investment portfolio. Call 01 276 0006 or email info@moneysmart.ie.

In the week that RBS tells us to “sell everything” ahead of a “cataclysmic year” it’s worth thinking about whether acting on market forecasts is of any value. Here are three reasons why forecasting is a waste of everybody’s time.

1. Nobody Knows The Future

Yes I know I’m stating the obvious here but it needs to be said again and again. Nobody knows where gold or oil or the S+P500 (or anything else) will be a year from now. And yet we (helped of course by all those ‘news’ headlines) so often succumb to these so-called experts who are, more often than not, wrong.

2. Which Forecast Is Right?

We’ve also heard this week from SocGen’s Albert Edwards, who thinks that the S+P 500 could fall 75% from here (no, not a typo, no decimal place between the 7 and the 5). ‘Renowned investor’ Marc Faber is much more optimistic, expecting only a 40% plunge in U.S. markets in 2016. But what about Citigroup, who expect a 23% rise in European equites, or Piper Jaffray, who foresee U.S. equities 15%  higher? And what about the hundreds of other forecasts in between? The problem? We just do not know which one will be correct. The solution? Ignore them all. Not only do the ‘experts’ not know the future but most of them got the past wrong too (Edwards predicted further plunges in U.S. equities in 2012, just before the start of a massive 3 year rally).

3. Trader Danger

If you decide to, say, switch out of equities into cash for the next 6 months because you think that stock markets have further to fall, the problem is you are now a trader, not an investor, and that brings with it a world of danger. What happens if equities rally while you’re stuck in cash? How do you time future entry/exit points? Do you honestly think you can successfully trade your portfolio?

What to Do?

We have to remember why we invest in the first place. Put simply, it’s because equities outperform inflation and cash in the long run. At Money Smart we firmly believe that the only way to handle inevitable market ups and downs is to build a long term multi-asset portfolio with the riskiness (or equity content) of that portfolio driven by two key factors: how comfortable you are with short term volatility and when you need the money back. Or to put it another way, we believe that trying to reposition portfolios every week, month or quarter so as to benefit from short term market forecasts is a complete waste of time and money.

Money Smart can build you a diversified long term investment portfolio. Call 01 276 0006 or email info@moneysmart.ie.

This week I take a tongue-in-cheek look at a few famous people who have unfortunately managed to lose everything by making what seem like simple mistakes (I’m avoiding some more recent examples closer to home).

4 Terrible Investors …

Winston Churchill not only lost a fortune in the Wall Street Crash but also managed to squander much of the family inheritance on gambling and booze. He was only saved from bankruptcy by a £1 million gift from a secret benefactor in 1940. Even prime ministers can live beyond their means.

Mike Tyson made up to $30 million per fight and amassed career earnings of $400 million and yet his current net worth is thought to be around $1 million. Let’s just say he’s a spender not a saver – and tigers can be expensive.

Nicolas Cage is another big spender. His film career has made him over $150 million but he is currently worth ‘only’ $18 million. His only weakness? Islands, castles, mansions, jets, luxury cars, rare art and jewellery.

Mark Twain lost all of his book earnings and most of his wife’s inheritance by investing (and losing) all of it on a new type of printing press. Which failed. The problem? Lots of eggs. One basket.

… and 4 Great Ones …

Warren Buffett started off with investment capital of $100 thousand at the age of 25 and has turned it into a net worth of over $65 billion in his lifetime. He has always followed a patient highly disciplined methodology, investing only in so-called ‘value’ companies.

John Maynard Keynes, in between writing seminal economic theories and saving the world, managed the investment fund of King’s College, Cambridge and produced returns that beat the market by around 8% annually over a period of 20 years. Mind you, he was also a Director of the Bank of England at the time which might have helped!

George Soros started from nothing and created the most successful hedge fund of all time. Using his own distinctive trading system, he averaged returns of 20% per annum for many years. Needless to say, he also made himself a billionaire (times 23) in the process.

Carl Icahn was first a stockbroker before becoming an activist investor. He has used his stock ownership positions to force changes in organisations that drive up the share price. These methods, sometimes controversial, have earned him a net worth of over $20 billion.

At Money Smart we can help you say no to the tiger and point you towards a long term low cost investing strategy. Talk to us on 01 276 0006 or email info@moneysmart.ie.

Downsizing your home is a big decision that requires plenty of thought and planning. A large home and garden is wonderful for raising a family but it may not be the right place for you once the kids have flown the nest. Downsizing is often a very attractive proposition but there are personal and financial implications to consider. Let’s have a look at the pros and cons you should think about before you make a decision as well as some dos and don’ts once you’ve decided to make the move.

The Pros

1. Retirement Funds Boost

Selling a larger house for a smaller one will provide you with a significant cash sum. Your retirement pot will receive a very welcome boost, which with careful management may, along with any existing savings and the state pension, be enough to support a long and happy retirement.

2. Lower Expenses

Downsizing undoubtedly cuts household expenses. You can expect lower utility bills, a reduced local property tax, lower insurance, cleaning, maintenance and gardening costs, and, if you also downsize your mortgage, lower loan repayments.

3. Easier Living

Saying goodbye to the demands of maintaining a large property can be liberating. It’s also a great opportunity to declutter. A smaller place requires less upkeep, giving you more time to get out there and enjoy the better things in life.

The Cons

1. Emotional Ties

You will most likely have an emotional attachment to your home. So many family experiences and memories are anchored in bricks and mortar. Plus, having space for visiting kids (and grandkids) may be important to you.

2. Greener Grass?

Yes the grass can be greener on the other side but not necessarily. You know (and love?) your neighbourhood so there is an element of risk in upping sticks and moving on.

3. Hidden Costs

Like most financial transactions there will be unforeseen and hidden costs. There will of course be estate agent fees and stamp duty to pay, and without the use of a trusted financial advisor, investing your ‘downsize dividend’ can be daunting. Nevertheless, your lower living expenses and increased investment returns should, over time, more than offset these costs.

Do…

1. Start The Process Early

We’re talking about a major life event so the more preparation and planning, the better. Getting to grips with the figures and researching the property market takes time. And don’t leave it too late in another sense – you might want to enjoy that boost to your finances while you still have the energy to do so.

2. Seek Financial Advice

Downsizing comes in two parts. First – the sale of your home for a smaller one. Second – the careful investment of your extra cash. I would strongly recommend you seek the advice of an independent financial planner so that the strategy for both parts of this transaction makes complete sense.

3. Research Your Market

Moving home is never easy. Try to get to know your new neighbourhood (and house) in advance so that you pay the right price for your new home and ensure there are no unpleasant surprises when you move in.

Don’t…

1. Buy Before You Sell

Buying your new home before you sell your current one will just create a whole load of unnecessary stress. You may end up needing (expensive) finance to bridge the time gap or selling other assets to create liquidity. It’s just not worth the hassle.

2. Tell Nobody

Any major life decision should be approached with as much family and friends support as possible, and the downsize decision is no exception. Make sure all your family are consulted in advance, regardless of how much you want to let them influence your decision.

3. Be Afraid To Change Your Mind

Don’t discount the option of staying put. Downsizing is almost always a good financial decision but personal circumstances should also play a big role in your thought process. You are allowed to change your mind!

This article first appeared in Irish Home magazine. For investment advice call Money Smart on 01 276 0006 or email info@moneysmart.ie.

This is the last of a short series of blogs on ‘alternatives’ – investments in anything other than stocks, bonds or cash. We have examined the four most common alternative asset classes in general order of risk/return profile; Absolute Return, Commodities, Property and Private Equity.

No.4 of 4 : Private Equity

What is it?

Private equity is the investment in the equity of a company which is not listed on a public stock exchange. Private equity firms such as Blackstone or KKR will generally start a new fund every three to five years. Most funds have a ten year life, typically investing in a portfolio of private companies in the first half of that decade and disinvesting over the course of the last five years. Private equity managers combine leverage with a focussed strategic or operational goal (aided by having a controlling stake in target companies) to create added value. This added value is crystallised into actual return on exit, which is normally achieved either by sale or by IPO. 

What are the Pros?

• Most data suggest that private equity has consistently outperformed public equity through bull and bear markets, perhaps by as much as 5% over the long run.
• Long locked-in investment periods deter poor manager and investor entry/exit decisions.
• Diversification into alternative investment strategies and into an asset class that is (arguably) uncorrelated to public equities.
• Benefit from the expertise and (legal) inside information of specialised managers in inefficient markets.

What are the Cons?

• Illiquidity – your funds can be locked away for as long as 10 years.
• Your commitment is generally called incrementally as the manager invests so you have to maintain a cash-like reserve that is quickly available for capital calls. If factored in to your investment this deflates total IRR considerably.
• Costs are high (management and performance fees) and opaque.
• Performance across various funds and managers is highly diverse.

How to invest?

A handful of Dublin private client brokers offer access (to qualifying investors) to the best known American and European private equity managers, either via single funds or funds of funds. This of course adds another layer of charges.

Do you need it?

Given the minimum investment is often €100k, I would advise that only investors with investment and pension portfolios of €1m+ need to consider adding private equity to their portfolios. And if you do invest, allocate no more than 20% of your total portfolio to this asset class and pick a fund of funds structure that offers both manager, strategy and geographic diversification.

Talk to Money Smart about how to build a portfolio with appropriate asset class exposure by calling 01 276 0006 or emailing info@moneysmart.ie.

Continuing our short series of blogs on ‘alternatives’ – investments in anything other than stocks, bonds or cash – in which we take a look at the four most common asset classes in general order of risk/return profile; Absolute Return, Commodities, Property and Private Equity.

No.3 of 4 : Property

What is it?

From my experience as a financial advisor, in Ireland property is far from an investment alternative. In fact for many, everything except cash and property are alternatives! So I think you’ll understand if I skip the ‘what is property?’ bit. What I will say is that today I’m evaluating property as an investment for those who already own their own homes. Just for the record, I believe that owning your own home makes really good financial sense for lots of reasons – which I’ll cover in a future blog. But for now, let’s just talk about non-home property investments.

What are the Pros?

• Expected long term returns of around 6% – higher than cash and bonds.
• Portfolio diversification as performance is not correlated to equities.
• Property is a ‘real asset’ that has an obvious ‘bricks and mortar’ capital value and pays (rental) income.

What are the Cons?

• Single property risk and hidden fees can be higher than expected.
• Can be subject to equity-like volatility and severe illiquidity.
• Diversification benefits cannot be relied on in a financial crisis.

How to invest?

You (or your pension) can of course directly buy an investment property and take advantage of expense income tax relief – but the capital gains tax exemption has now been phased out. Or you can avoid the additional costs, worries, single property risk and leverage risk (if you’re borrowing to invest) of being a landlord by simply buying a property fund which exposes you to a large portfolio of property assets.

Do you need it?

Not necessarily, but for a more balanced portfolio, yes. At Money Smart we stopped recommending direct property investment once the capital gains tax exemption ended. But we do believe that your investment portfolio can benefit from a small exposure to a diversified property fund (or ETF or REIT) which may have both direct and indirect commercial (and perhaps residential) property holdings.

Talk to Money Smart about how to build a portfolio with appropriate asset class exposure by calling 01 276 0006 or emailing info@moneysmart.ie.